San Diego apartments good for investors, hard on renters

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San Diego has one of the strongest apartment markets nationally in terms of investments, along with still-high rents and declining vacancies, according to The CoStar Group.

In its third quarter survey of 287,659 units in 10,511 properties with five or more units, CoStar found 5,784 vacancies, which translates to a 2.7 percent vacancy rate.

A 5 percent rate, considered an optimal level by the industry, is about roughly where it stands on the national level.

"San Diego's is very low compared to the rest of the U.S.," said Tom Rudowicz, a CoStar (Nasdaq: CSGP) sales director.

Except for a slight uptick earlier this year, the county's vacancy rate has been moving downward since about 5.6 percent in mid-2009.

Although asking rents have flattened nationally and in San Diego County, CoStar reported the wages haven't kept pace even with the slowdown.

Asking rents at the end of the quarter in San Diego by CoStar's accounts were $1,035 per month for a studio, $1,205 per month for a one-bedroom unit, $1,492 for a two-bedroom unit and $1,782per month for a three-bedroom unit.

CoStar tracked 293 apartment properties sold since the beginning of this year, accounting for a $1.28 billion sales volume. These figures exclude bulk or portfolio sales.

The estimated $1.8 billion in transactions in 2013 included Alliance Residential's $160 million purchase of the 549-unit Coronado Bay Club in Coronado in December.

The average sales price of a complex with five or more units was $4.4 million and the average sales price per unit was $163,643 as of Sept. 30.

The average price per unit has been on quite a ride in San Diego County.

Starting at about $111,000 in 2009, it leapt higher than $140,000 level in 2010 before leveling off and then diving below $130,000 per unit. The average price then rose in 2012 and 2013, before settling back down to its current level.

While the average time it takes to sell an apartment complex has declined slightly, variations have been minor.

The time, which stood at about 3.7 months in 2009, has declined slowly since 2011 to 3.2 months at the third quarter's end in 2014.

Capitalization rates have continued to decline as apartment demand exceeds supply. Rates that stood at about 6.6 percent in 2010, had dropped to less than 5.2 percent this fall.

While REITs, along with institutional and major private equity firms, get much of the attention, CoStar said 90 percent of apartment transactions with five or more units in San Diego involve individuals.

The next largest group are private equity firms, with 5 percent of the total and public REITs with about 3 percent.

Excluding bulk or portfolio sales, San Diego-based R&V Management Co. acquired the most apartment properties in San Diego County through this year's third quarter.

Along with acquiring more than $150 million in properties, R&V paid $150 million for just one complex when it picked up the 644-unit Greenfield Village property on Otay Mesa in September.

R&V, which also sold assets, owns more than 7,000 apartment units in San Diego County.

CoStar tracked about $95 million of acquisitions by Jackson Square Properties, including the $51.95 million sale of the 300-unit Lakeview Village Apartments in Spring Valley in February, and paid $43.47 million for 208 units on Golfcrest Drive in the Mission Trails area earlier this year.

That property is jointly owned with the Friedkin Realty Management Group, which itself had more than $90 million worth of transactions thus far this year, according to CoStar.

Prior to the San Diego multifamily presentation, CoStar delivered a national report with analysis by multifamily experts Luis Mejia, Francis Yuen and Mark Hickey.

By CoStar's accounts, the average number of people occupying an apartment unit has climbed 2.4 to 2.5 during the past year.

"This equates to 1.5 million more new households," Yuen said.

Both Yuen and Mejia noted that with virtually all of the market-rate apartments being constructed, of the Class A variety, affordable rents will remain elusive in many parts of the country, including here because of stagnant wages.

"Only so many people can afford these Class A rents," Mejia said. "Homes need to be affordable … with college tuition climbing a 6½ percent per year, it may not be possible. This generation is going to take longer to get homes than earlier generations."